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Inflation has been a topic of conversation for many months now. Since hitting a 40-year high of 9.1% for the 12-month period ending in June 2022, we have seen a slight reduction. Even so, experts predict that inflation will continue to be at higher levels than we are accustomed to for the rest of 2022 and possibly into 2023. Given this trend, employees will continue to feel the pressure of increased costs of gas, groceries, housing, and other items, which puts pressure on employers to look at worker pay and reevaluate their pay philosophies.

It is a typical employee reaction that as inflation remains high, so do their expectations that their pay will increase. Employees are also thought to be in a better position to ask for what they want in terms of pay, given low unemployment, forcing employers to offer higher wages to keep up with the fight for talent. With higher wages being offered to new hires, employers must deal with higher levels of pay compression, which is when less-experienced employees are earning as much or more than long-term, more-skilled workers in the same role. Given the unique time we live in, below are some compensation and total rewards strategies to consider.

Evaluate Your Pay Philosophy

First, let’s talk about your philosophy and base pay structure. To begin with, do not be tempted to increase pay to directly match current inflation rates. Since inflation is not a typical factor employers use to determine compensation budgets, it should not be a new factor used now. Instead, if you haven’t recently revisited your pay philosophy, now is the time. Do you state you will pay at, below, or above market, and do you know if you are currently meeting that commitment? Do you need to adjust your philosophy on pay due to economic conditions and your ability to pay? Do you need to look at different pay philosophies for various positions, especially hard-to-fill roles?

Your philosophy is the foundation for everything you do in compensation. It is important to be realistic with your approach and communicate honestly with employees. Increasing transparency during these difficult times can help employees understand how your organization determines pay. Transparency also takes away the potential for employees to make up their own stories about compensation in the organization and helps show how pay is competitive. You may need to adjust your philosophy periodically, and it is vital to stay on top of needed changes.

Once you have your philosophy, conduct a market study to see if your current pay aligns with your stated approach. Evaluating pay is important not only for new hires but also for your long-term staff. Are your salaries keeping up with the labor market? Right now, looking at least on an annual basis at your jobs in the appropriate markets to keep up with pay is vital, given how fast the market is shifting.

It is also important to increase your entire compensation structure periodically so it can keep up with changes in the market. If it’s been a while since that was done, now may be a good time. Additionally, you can look at pay structure increases when you conduct your annual budget process. That would allow for a one-time structure adjustment rather than multiple small ones.

Assess Your Options

Second, look at your options for paying employees. You may decide that providing an off-cycle increase is appropriate in this time of inflation. Pay increases can be tied to performance, or they can be cost-of-living adjustments. You may also decide to only provide increases to employees in roles most affected by inflation. For example, analyze your entry-level positions and determine if starting pay may need to increase. Helping employees with their concerns regarding being able to pay their bills, especially given high gas and grocery costs, will aid in them being more focused and productive. Looking to your philosophy will help guide you on what would be most appropriate given your organization. According to the Employers Council 2022 Cost of Living Adjustment (COLA) Survey, 26% of reporting organizations are providing additional pay as part of increases.

Another option could be a one-time lump-sum or sign-on bonus for new hires. The option can be very attractive given that additional costs typically associated with raising base pay are not incurred, for example, life insurance or retirement plan costs. According to our COLA survey, 17% of employers are considering this option.

Beyond pay, it is important to look at your total rewards program, especially if your company does not have the budget for base pay increases or lump-sum bonuses. Ask employees, don’t assume, what they value most in terms of the offerings in your total rewards package. Make sure to cover all the different components, including benefits, work/life, employee performance, employee development, and meaningful work. You may be surprised by what employees have to say.

Since the COVID-19 pandemic began, employees have been looking for more flexibility from employers. Keep in mind, this does not only mean remote work but also the ability for employees to have a sense of control over schedules. An example is allowing for flex time, where employees need to be working during core hours and can flex on either side based on life needs. It could also entail a compressed workweek, such as four 10-hour days or three 12-hour days or being able to work with colleagues to swap shifts more readily.

Other benefits to consider include paid family leave, a targeted approach to mental health offerings and reducing stigma, and tuition repayment assistance. Also, remember that employee development is always considered a top contributor to employee engagement. Now is not the time to cut back on training needs, succession planning, reskilling, and upskilling your current talent.

Consider the Impact of Culture

Finally, do not overlook how your culture can aid in attracting and retaining key talent. Evaluate your management practices and ensure front-line managers are equipped to deal with the various employee situations. Employees will remember how they were treated and how you made them feel much longer than what you did and said in a specific situation. Look holistically at the experience you provide employees. If there are areas of concern, now is the time to fix them.

As inflation continues to be a hot topic, don’t let employees control the conversation. Make sure to provide employees with information regarding your total rewards offerings. Although pay is important to attracting and retaining employees, it is not the only component. Make sure to address pay, because everyone else will, but remember to highlight what makes you unique as an employer. The future of attracting and retaining employees in the era of inflation may be more focused on total rewards and culture than pay. If you have any questions, please email the Member Experience team.